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California budget surges to record high as tax revenue soars; Brown pledges to pay down debts

SACRAMENTO, Calif. - A robust economic recovery and surging revenue propelled by voter-approved tax increases have sent California's general fund spending to a record high, marking a dramatic turn-around from the state's days as the nation's poster child of fiscal dysfunction.

Yet Gov. Jerry Brown, in releasing his budget proposal Thursday, pledged to take a sombre approach in spending the windfall. He said California must begin paying down what he has called its massive "wall of debt," a stew of unfunded liabilities, bond debt and borrowing that is estimated at $355 billion.

His somewhat cautious approach will run afoul of some of his fellow Democrats in the Legislature, many of whom already are clamouring for higher spending on pet programs.

"When you're at this level of long-term liability, it isn't time to just embark on a raft of new initiatives," Brown said in announcing details of his budget during a Capitol news conference.

The news conference was moved up a day after copies of his budget proposal were leaked to media outlets late Wednesday. He was scheduled to promote his budget plan later Thursday in San Diego and Los Angeles.

The governor's budget proposal for the 2014-15 fiscal year dedicates $11 billion to paying down debts and liabilities, including $6 billion in payments that had been deferred to schools and nearly $4 billion to pay down the so-called economic recovery bonds left over from the administration of Gov. Arnold Schwarzenegger.

It does not address long-term liabilities in the state's teacher retirement fund, which will require billions of dollars extra a year to make solvent. Instead, Brown said he wants to create a plan for long-term solvency this year. The teachers' pension fund is estimated to be $80 billion in the red.

The record $106.8 billion general fund exceeds the spending level of just before the recession by more than $3 billion and is a nearly 9 per cent increase over spending in the current fiscal year.

The governor also sets aside $1.6 billion for a rainy day fund to protect against future downturns, saying "wisdom and prudence should be the order of the day."

California's financial turnaround is due in large part to temporary increases in the state sales tax and income taxes for the wealthy that were approved by voters in 2012. Combined, those tax increases are expected to generate about $6 billion a year.

The state also has been adding jobs at one of the fastest rates in the nation since the recovery from the recession began, led by the technology sector.

The state's legislative analyst forecasts that California will have a $3.2 billion operating surplus by the end of the fiscal year, one that is expected to approach $10 billion within three years.

Brown has warned against spending all the surplus on new programs or to restore services cut during the recession, saying the state needs to prepare for future recessions and get control of its debts.

"Now some people would say, because we have this little black mark there, that we should go on a spending binge," he said, pointing to a chart showing this year's surplus. "I don't agree with that. We see the lessons in history."

That approach appeals to minority Republicans, who generally praised the budget while warning against spending pressure from Democratic lawmakers in the months ahead.

"I like where it's at," said Assembly Minority Leader Connie Conway, R-Tulare. "My fear is that it's not going to stay as constrained as it is right now."

The governor's cautionary approach is caused in part by the source of the state's revenue. His budget assumes about $4 billion in capital gains tax revenue, driven largely by the soaring stock market. But it also acknowledges that such income is highly volatile and will be short-lived.

Brown's tax increases under Proposition 30 will begin expiring in a few years: The state sales tax hike will last four years and the higher income taxes on those making more than $250,000 a year will last seven years.

Yet pressure for more spending already is coming from Democrats who control the Legislature.

Senate President Pro Tem Darrell Steinberg, D-Sacramento, has said at least one-third of the surplus should go to restoring programs that experienced spending cuts, and he is advocating a new statewide program that would provide pre-kindergarten for all 4-year-olds.

Sen. Noreen Evans, D-Santa Rosa, urged restored funding for welfare and other programs that affect women and children.

The Legislature will debate Brown's proposal in the coming months and faces a June 15 deadline to pass its own spending plan.

Despite Brown's call for budgetary prudence, the 8.5 per cent increase in general fund spending over the current fiscal year includes additional money for nearly every area of state government. That includes $45.2 billion for K-12 schools, an increase of nearly $4 billion from the current fiscal year.

The University of California, California State University and community college systems will receive a total of $1.1 billion. About half the money would go to community colleges, which are expected to grow rapidly in the next few years.

In its budget document, the administration said the extra higher education spending should be accompanied by reforms that improve student success and make the institutions more efficient.

The budget also proposes $815 million for critical deferred maintenance in state parks, highways, schools, courts and other state facilities, and $619 million to expand water storage capacity, improve drinking water supplies and increase flood protection.

One of the Republicans who will challenge Brown this year if he decides to seek re-election said Brown's budget still proposes too much spending, saves too little in reserves and does not do enough to create tax incentives that will keep businesses in California.

"We're seeing people literally get a U-haul and leave California, and he's spending money like it's 1999," said Assembly Tim Donnelly, who lives in the San Bernardino Mountain community of Twin Peaks.

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Associated Press writers Don Thompson and Tom Verdin contributed to this report.

The Canadian Press


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